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AirBoss of America Corp. (TSE:BOS) Is Employing Capital Very Effectively

Simply Wall St

Today we'll look at AirBoss of America Corp. (TSE:BOS) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for AirBoss of America:

0.079 = US$18m ÷ (US$293m - US$58m) (Based on the trailing twelve months to March 2020.)

Therefore, AirBoss of America has an ROCE of 7.9%.

View our latest analysis for AirBoss of America

Does AirBoss of America Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, AirBoss of America's ROCE is meaningfully higher than the 5.4% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the industry comparison for now, AirBoss of America's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

The image below shows how AirBoss of America's ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSX:BOS Past Revenue and Net Income June 21st 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for AirBoss of America.

What Are Current Liabilities, And How Do They Affect AirBoss of America's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

AirBoss of America has current liabilities of US$58m and total assets of US$293m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From AirBoss of America's ROCE

With that in mind, we're not overly impressed with AirBoss of America's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than AirBoss of America. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.